Caracas Chronicles

Revolutionaries and the opposition don’t see eye-to-eye on almost anything, but in their public pronouncements they both seem to care about one thing: making sure workers have a decent minimum wage.

President Chávez was a huge fan of the policy of raising the minimum wage to make it seem like he was improving workers’ wellbeing. In 14 years of government he raised the minimum wage 21 times, and President Maduro has maintained the push with a whopping 11 minimum wage increases in little less than 3 years.

But, to be clear, just like the exchange controls, price controls and many other forms of interventionism, the Venezuelan minimum wage was not invented under Socialismo del Siglo XXI. It is not a child of Chávez, much as chavistas might claim it is. It is also not the panacea our politicians think it is.

A brief history of Venezuela’s minimum wage

In 1958, the Law stated that the Executive Branch could intervene indirectly in the setting of wages. The Law on Collective Agreements by Branch of Industries, published in Gaceta Oficial No. 25,818 on November 21st 1958, stated that “the collective agreement in the labor-management agreement or the arbitration award may be declared by the National Executive of mandatory extension to other firms and workers in the same industry.”

The minimum wage itself was fixed for the first time by President Carlos Andrés Pérez in 1974 -ironically enough- vía Ley Habilitante (Enabling Act): ordinal 10 of Article 1 of the Enabling Act empowered the President to “enact minimum wage and increases in salaries, wages and benefits required to raise the living standards of the population and improve the distribution of income in accordance with the general policy that defines the National Executive.”

So, through Decree-Law No. 122 of May 31st, 1974 (published in Gaceta Oficial No. 30,415 of June 4th, 1974), Presidente Pérez set:

1. A daily minimum wage of Bs 15. (Article 1)
2. A monthly minimum wage of Bs 300 for domestic workers, when the employers earned over Bs 4,000 per month. (Article 2)

Fast forward 5 years and in 1979 Congress passed a General Law for the Increase of Salaries, Wages, Minimum Wage, Retirement and Old Age, Disability and Death Pensions (Gaceta Oficial Extraordinaria No. 2,518 of December 3rd, 1979). This law set:

1. A daily minimum wage of Bs 30. (Article 6)
2. A daily minimum wage of Bs 25 for workers engaged in agricultural and livestock activities. (Article 7)
3. A monthly minimum wage of Bs 500 per month for domestic workers.(Article 8)

The love affair with the policy continues to this day. From 1984 until today, Presidents have continued to write Decrees to fix new minimum wages. Between 1974 and 1998 the urban minimum wage was adjusted and set 13 times: less than one per year. Between 1999 and March 2016 there have been 32 increases in minimum wage: nearly two per year.

It’s undeniable that Venezuelans are pretty much used to having a minimum wage fixed by the President, and they even applaud the fact. But, why?

The answer is rooted in the According to Chi-Yi Chen, the “direct intervention of the Venezuelan State in fixing wages reflects certain positions. These are: a) The worker is always exploited; never gets his due; b) The employer is enriched only through the exploitation of labor; c) Following the above two positions is conceivable that the only mechanism to equitably share the  surplus of the productive society is to compulsively impose a certain level of remuneration. The history of state intervention in recent decades exactly reflects these ideas, obviously influenced by the Marxist conception of capitalism.”

But is it a good idea?

When the first minimum wage was set in 1974, there were concerns. According to Hector Valecillos Toro,

Superficially, the measure seemed justified and could be seen as a discretion in favor of fair participation of workers in the sudden oil wealth. However, viewed less emotionally, it was clear that it wasn’t convenient to rush into a measure that often cause problems of a different kind.

First, because under President [Rafael] Caldera the inflation pace begun to accelerate (which, let us not forget, had been absent from the country between 1950 and 1969) and it wouldn’t be easy to circumvent the upward impact on prices of such decision. Second, and perhaps foremost, because the government chose a highly inconvenient mechanism to pay the staff, which by definition dissociates compensation and labor productivity “.

To understand these points better, let’s take a quick a pretty simplified trip down economic theory lane. Of course the academic debate over the impact of minimum wage laws continues to rage and the literature is enormous, but this is the bare-bones standard model people refer to when they participate in that debate.

A fixed minimum wage supposedly seeks to ensure that formal workers have a minimum monthly income to cover the basic needs of his family. So the minimum wage is increased when the old wage becomes insufficient to meet this goal.  

But there is also the market equilibrium wage, the wage that would result if labor markets were allowed to work unencumbered. This wage would reflect the productivity of workers in each industry, and the particular dynamics in each market.

If, for example, a minimum wage is fixed above the market equilibrium wage, many more individuals will be willing to work than companies willing to hire them. Companies would have fewer incentives to recruit new personnel, thus increasing unemployment. Whether this is important or not will depend on the other factors affecting labor demand and supply.

In contrast, if a minimum wage is set below the market equilibrium wage, companies will want to hire more staff, but many individuals won’t have incentives to fill such positions at such low salaries. Ultimately, the minimum wage ends up not being used much. And let’s not forget that the supply and demand of labor force in each productive sector is different, so the equilibrium wage of each market is, in turn, different.

Fixing a minimum wage that does not correspond to the market equilibrium wage will generate distortions – the debate then is about how deep those distortions are, and whether or not there are benefits tied to them. And fixing it exactly at the equilibrium level is practically impossible, because nobody knows what that level is.

The important point is that wage levels should, above all, have some relation to workers’ productivity. If this condition is not met, an increase in minimum wage will ultimately translate into unemployment, and in an inflationary context, the minimum wage will become insufficient, the Central Government will probably increase it and the distortion game will begin anew.

In 1993, Chi-Yi Chen wondered “has the minimum wage really played the role that it was assigned, that is, to maintain a socially acceptable standard of living?”

The current minimum wage in Venezuela is at BsF 11,578 plus BsF 13,275 in food benefits. While this wage doesn’t cover the basic food basket, it also represents a substantial burden for formal companies, given the deep price distortions and controls under which they operate and the excessive labor regulations that stifle productivity.

Ironically, the minimum wage actually becomes an obstacle to formal businesses, reduces the number of quality jobs and creates incentives for formal workers to seek better wages in the informal market. Venezuela is then stuck in the worst of both worlds: with a minimum wage that is too low to afford basic necessities, and too high for companies to bear given the terrible business environment workers operate in.

We should all remember this: every time the government announces a new rise in the minimum wage in an inflationary context such as ours, it means that it has failed.

Raising the minimum wage is nothing but a means to an end. Raising the minimum wage with no concern for productivity should not be the goal. Raising the minimum wage while doing nothing to stem inflation is close to useless.

The goal should not be to raise the minimum wage per se. The goal should be to not have to raise it.